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Saxo Bank’s top 5 tips for investing during a US dollar boom

March 13, 20152,157 Views

by Emmanouil Lemonakis, Head of the Central Eastern Europe Region for Saxo Bank

Already this year the remarkable US dollar strength has caused analysts to tear their forecasts up and look again at the possibilities for when this trend may slow down. At the start of the year those analysts who were taking an aggressive position were forecasting EUR/USD may hit 1.1000 by year end and yet now the sheer power of US dollar strength is causing those same analysts to re-think their positions with parity or even 0.9500 being discussed as possible this year.

Much has been discussed about what has caused this dollar strength, with the astonishing rise of the greenback being attributed to several simultaneous market occurrences; US monetary policy leading to a steadily recovering US economy, the expectation and advent of quantitative easing (QE) in the Eurozone which has weakened the euro, as well as stimulus from other countries, such as the Bank of Japan, which has put pressure on other currencies.

Alongside the US strength we have seen the price of oil plummet, sending shockwaves through the markets. Oil and the US dollar have a close correlation due the fact that the commodity is priced in USD. Traditionally, when the US dollar strengthens, the price of oil weakens, and vice versa.

Volatility in the markets can be challenging to trade, but it can also bring opportunities for those with their fingers on the pulse. Here we present to you Saxo Bank’s 5 top tips for investing during a US dollar boom.

Stay ahead of the trend

This sounds like an obvious tip, but those investors that were closely tracking USD pairs and got on board buying the US dollar at the start of the uptrend will have done well out of this period of US dollar strength. But beware as the seemingly unstoppable trend for dollar strength will have an end at some point. As John J Hardy, Head of FX Strategy at Saxo Bank, says: “It’s tough to build a case for the timing of a USD dollar recovery, so we’ll have to take it one day and one event risk at a time.” The mark of a successful trader is knowing when to take your profit by exiting a trade.

Diversify your portfolio with CFDs

Investors in CFDs – contracts for difference – realise a gain by forecasting whether the price of an underlying asset will increase or decrease. CFDs are a derivative product that can be used to trade commodities (including oil), stocks, indexes and funds. There has been in a surge in interest for CFDs recently particularly as it is possible to take advantage of downward moving prices (going short) as well as upward moving prices (going long). This is one way to take advantage of a downward trend in a market, such as has been observed with oil recently. CFDs are also useful for hedging and protecting other investment in a multi-asset trading portfolio.

Adapt your investments based on their performance

With the US economy now showing consistent growth, foreign investment is returning to the US which is positively influencing the performance of US equities. Both Eurozone and Japanese equities continue to suffer from the impacts of monetary stimulus policies which makes them less appealing to investors than US equities. Likewise, higher interest rates in the US compared to other major economies are making US bonds more attractive to foreign investors.

Take short term positions in commodities

In times of market volatility investors are renowned for turning to safe haven investments, particularly gold. While gold tends to have an inverse relationship with the US dollar so that it weakens when USD strengthens, the relationship is not as strongly linked as USD and oil. This means that even with an overall bullish trend for the USD there may be some small breakouts by gold that provide short term opportunities for investors.

Surf the wave of volatility

As US monetary policy continues to dramatically diverge from that of the EU and Japan the signs are pointing towards 2015 being a highly volatile year in the currency markets. The divergence of policy is creating sharp swings and breakouts in the currency markets that be capitalised on for financial gain. Just like in surfing, investors need to time their entry to the currency markets well in order to jump on board and ride the crest of the wave all the way into shore.